Lease agreements sending business owners bust

Commercial property tenants are being caught in costly legal disputes arising from their own failures around the lease agreements they sign.

A number of issues keep cropping up again and again, according to Mark Gardiner of Teddington Legal, which can lead to unexpected outgoings or disputes with the landlord.

“We see a number of things. The first one is not having a clear understanding of the obligations,” Mark says on the My Business Podcast.

“If there’s a retail tenancy, governed by the Retail Tenancies Act, there needs to be a disclosure statement given by a landlord, which sets out in great detail what the obligations of the tenant is through the term of the lease.

“A lot of people don’t take a lot of notice of those, but they should … they’re almost an executive summary of some of the key points in the lease. Tenants should be aware that they’re liable for those obligations.”

Another common problem, according to Mark, is that people assume commercial and retail property leases operate in the same way as residential leases.

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“It’s not like a residential lease where if you want to get out of it, you can just notify the landlord and you’re out of it easily,” he says.

“[In a] commercial or retail lease, you have an obligation for the length of that term. So if you want to get out of it early, you then have to negotiate with the landlord about what happens to the balance of that term.”

Problems tend to arise if the landlord is unable to find a new tenant, whereby you, as the existing tenant, are obliged to continue paying the rent.

Mark recalls the experience of one client who’s caught out by this point:

“We had one client who had a five-year lease. After about a year-and-a-half, it was pretty clear that they weren’t able to make enough money to pay the rent and feed their family,” he says.

“They battled on for six months and in about two years they closed the shop, having not paid the rent for about four months. So straight away there’s large debt, and the lease had fairly substantial interest penalties for late payment.

“Then they’re out of the premises, but the landlord’s still chasing them for the money. And the landlord was trying to re-let the premises but couldn’t. A year later, when the matter got to court, the premises were still empty and the person had a very large debt to pay to the landlord.”

Such an experience, says Mark, can ultimately claim not just the business but also your personal finances.

“Most people look at getting out of their rental premises when they’re in financial trouble; sales haven’t been what they hoped for, downturn in the economy, finding it really hard to compete with online businesses,” he points out.

“So they’re saying, ‘Well I’ve got no option but I’ve got to close my shop’ … but it doesn’t end the financial obligations and it doesn’t end the pain. We’ve seen people lose their house because of a lease they’ve signed.

“So people really need to think very carefully about going into rental premises for their business.”

Hear more legal troubleshooting from Mark on the My Business Podcast below: